Touché, American Consumer

Talk about being too negative. I have to tell you that I, myself, was one of many people who were too negative about the retail sector as we came out of the holiday season. I say "many" because it looks as though the hedge funds came in short retail. It appears this was partly due to the warm weather, partly because the retail group stood the most to be hurt by the "fiscal cliff" and partly because the terrible tragedy in Newtown, Conn., put an extraordinary damper on selling during a key weekend before Christmas.

But when you see these share jumps after pretty good quarters, you know that's the work of hedge funds. You know they're throwing in the towel on what's amounted to a pretty terrible bet on all but a few of the stocks in the sector.

Of course, retail remains something we must take on a case-by-case basis, as it always is -- and some of the cases look surprisingly basket-like. One thing is certain, though: The better-off American spenders took no break ahead of a cliff-jump that has really cut into after-pay dollars for many folks, and will end up crimping the top 1% for certain.

Nordstrom (JWN), for example, reported a standout quarter and clearly qualifies as best-of-breed among the publicly traded department stores. Ross Stores (ROST) and Target (TGT), two companies where the great middle class shops, were expected to miss on their quarters. Wrong. These two came back strong from near-term worries and caution, and you have to respect their respective management teams for managing reversals from recent negative trends.

TJX (TJX) and Costco (COST) continue to amaze with their consistent reporting, and that's purely a story of tremendous management for each. Nothing new there.

Finally, Gap (GPS), one of my absolute favorite retailers, issued some terrific numbers and made a fantastic acquisition of Intermix -- a smart, fashionable company that will complement its other brands, including Old Navy, Banana Republic and Athletica. I suspect that Intermix, much like Lululemon (LULU) clone Athletica, will do its best to keeps its distinctly non-Gap identity. While Gap shares are down today, I think that's a function of a recent bounce, and I would not be surprised if the stock starts returning to its upward ways shortly. It's the retail name I like the best after these terrific numbers, and the shares are giving you one more terrific entry point.

But not everyone came through for the holidays. We are seeing the wholesale destruction of the formerly favorite dollar-store segment, with hideous numbers from Family Dollar (FDO) and horrendous commentary about gross margins. The company also joins Dollar Tree (DLTR) and Dollar General (DG) in expressing concerns about the future.

Some of this dollar-store weakness could be from Wal-Mart (WMT) getting aggressive, going after these companies with both barrels. But a lot of it just might be that there are price wars everywhere in the cohort, and particularly on consumables. I caution you not to bottom-fish in this group, if only because the 2% payroll tax cut ended Dec. 31, and the dollar stores will be hurt the most by that change.

While the fourth quarter is the most important period for retail, I am reluctant to go whole hog on the group after these moves today. There are cross-currents galore that could impact the group in what would normally be some unimportant months, and while the retail stocks are cheap, most are not so cheap after today as to make me believe the risk is gone.

That said -- holy cow, the well-off and middle-class consumers have been consistently underrated by just about everyone, including myself. Once again, the short sellers just can't catch a break. All I can say about that is, sorry, but there are no tears to be shed for that crowd this quarter.

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